This paper reviews the strategic nature of open book 'financial' management (hereafter referred to as open book management) in optimizing an organizations return on human capital and illustrates it using Manco Inc., as a case study. The challenges and advantages of implementing open book management to improve financial performance and employee motivation are described briefly, as are some suggested procedures and steps to facilitate the implementation of open book management. Open book management is seen as being useful in minimizing agency costs as it reduces the degree of asymmetry in the information available to managers and employees especially in non-public multi-divisional public companies.

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5

Open Book Management—Optimizing Human Capital

W

Open Book Management—

Optimizing Human Capital

Raj Aggarwal and Betty J. Simkins

Here we will review

the strategic nature of

OBM in optimizing the

deployment of human

capital by illustrating its

application at Manco

Inc., a successful supplier

of consumer products to

major U.S. retailers. And

we shall offer sugges-

tions as to how other

firms may implement

OBM.

OBM AND STRATEGIC

ADVANTAGE

pen book

management

as a term has been credited to John

Case of Inc., who began using it in 1993 to refer

to this business approach. The method itself be-

came popular in the early 1980s as many North

American companies were losing their competi-

tive edge and experiencing weak financial perfor-

mance due to stepped-up foreign competition,

high inflation, increased borrowing costs, and

recessionary conditions. The many management

fads developed during this period generally im-

proved only a particular aspect of the business,

such as quality, rather than the overall business,

because their focus was limited to that one aspect

without considering the entire operation. More-

over, although many of these management tech-

niques recommend empowering people in their

jobs, unlike OBM they fail to address the limita-

tions that arise from the significant differences in

power between managers and employees when

it comes to access to financial and other informa-

tion. OBM, then, can be viewed as the "missing

link" in making many managerial methods more

effective over the long run.

The case of Manco

Inc. shows how a

company can open

up "confidential"

information and

motivate all of its

employees to focus

on business growth

and profitability.

"People acting together as a group can

accomplish things which no individual

acting alone could ever hope to bring

about." —Franklin D. Roosevelt

hen President Roosevelt spoke

these words, he probably was not

thinking specifically about manag-

ing a business. Nevertheless, his statement seems

to capture the essence of open-book manage-

ment, or OBM. What is OBM? It is a way of man-

aging a company demonstrably, without conceal-

ment, that motivates all employees to focus on

helping the business grow profitably and increas-

ing the return on its human capital. Literally, it

means opening a company's financial statements

to all employees and providing the education that

will enable them to understand how the com-

pany makes money and how their actions affect

its success and bottom line.

A crucial component of OBM is that employ-

ees have a direct stake in the company's success.

The goal is to persuade every employee to think

and act like an owner in the business. As a result,

employees' goals and actions can be more closely

aligned with those of the owners, greatly reduc-

ing the agency problem (inadequate goal congru-

ence) between employees and owners. Wal-Mart

is probably the first well-known company to em-

brace OBM, which is often described as a phi-

losophy of running a business. However, Spring-

field Remanufacturing Corporation (SRC) in

Springfield, Missouri is undoubtedly the first com-

pany to enthusiastically promote the technique,

which it calls the "Great Game of Business."*

*Editor's note: In addition to Stack (1994), D. Keith

Denton discusses SRC's culture of openness in at least

two of his BH articles, "Entrepreneurial Spirit" (May-

June 1993) and "Open Communication" (September-

October 1993).

O

Business Horizons / September-October 2001

6

Figure 1

Manco Inc. Product Lines

Manco's three strategic business units supply

products throughout the U.S. and in 59 foreign

countries. The products are sold in commercial

office supply stores and superstores, hardware

stores, home centers, food and drug stores,

and discount store chains.

Office Stationery

• CareMail mailing and shipping supplies

• Carton sealing tapes

• Mailing and packaging tapes

• KID'sCRAFT creative learning products

DIY

• Pressure-sensitive tapes, including

Duck® Brand duct tape

• Mounting products

• Weatherization products

Home Solutions

• Easy Liner, Smooth Top, and self-

adhesive Easy Liner

• Softex houseware products

The ideas that form the basis of OBM have

been developed further in recent years by man-

agement and finance experts. Johnson and Kaplan

(1987), for example, showed that existing man-

agement accounting systems are inadequate and

that new systems are needed to help managers

better in long-term planning. Johnson (1992)

emphasized the importance of informed "bottom-

up empowerment" in developing high levels of

customer satisfaction and long-run competitive-

ness. OBM is a clear and essential aspect of such

empowerment. It is also an essential prerequisite

to the use of such measures as economic profit

(EP) or economic value added (EVA), which can

optimize the use of capital assets in a company.

Traditional management literature recognizes that

OBM can contribute to organizational efficiency

and effectiveness as well. It is not only an impor-

tant aspect of culture and communication sys-

tems, but also of building trust in management—

a key component of organizational social capital,

flexibility, entrepreneurship, and competitive

advantage.

OBM is a way to optimize the use of human

capital. Because of revolutionary advances in

technology, the sources of wealth creation have

been shifting to intangible assets, high-tech capa-

bilities, and human capital. As a result, variable

costs such as direct labor and material have been

declining as a proportion of total costs. Fixed

costs, which are difficult to allocate and may lead

to mistakes in assessing product line and cus-

tomer profitability, now make up increasing por-

tions of the costs of goods and services. They can

be attributed primarily to "people costs"—over-

head, product development, technology, and so

on. Effective use and management of intangible

resources relies on the efficient use and deploy-

ment of human capital, which in turn relies on

empowerment and information—an alignment

between information structure and decision rights

in a business. OBM, then, is clearly becoming

more important for corporate strategy.

Given their focus on managing company

information, the accounting and finance functions

must also play a key role in optimizing human

capital. The recent adoption of new accounting

and finance technology means that traditional

transaction-focused activities are now close to

their optimal level of efficiency in most modern

firms. Thus, developing and implementing OBM

procedures designed to optimize human capital

can be a new leadership focus for accounting

and finance groups. Whereas OBM can be useful

for a wide range of businesses, it is particularly

important in private firms and in divisions of pub-

lic companies in which financial and other per-

formance data are not readily or widely available.

To optimize the use of human and other

capital in a firm, the distribution of decision

rights among employees must be aligned with

the employees' access to appropriate information.

Proper alignment requires that management prac-

tices satisfy a number of conditions. First, em-

ployees need adequate information appropriate

for business decisions combined with the power

to make such decisions. Second, although such

empowered individuals may be motivated by

different factors, they need to work toward a goal

or goals consistent with the rest of the organiza-

tion. Third, they need similar information on

corporate performance and goals to reduce in-

congruence and prevent losses that may result

from conflicting goals. OBM adds the necessary

elements of business literacy and widespread

information sharing so that all employees know

the performance drivers and can participate in

making the business more profitable. Openly

sharing information and rewards among employ-

ees can also lead to peer pressure for improving

performance, thereby reducing supervisory costs.

Moving to OBM can be a challenge, how-

ever. It entails changes to corporate culture, espe-

cially if the firm has a tradition of centralized

command and control. Such changes require the

enthusiastic leadership of the CEO, in addition to

one or more highly visible and active champions

in the firm. Initial attempts to move to OBM may

be met with skepticism, suspicion, or even out-

7

Open Book Management—Optimizing Human Capital

right hostility. Many employees may

not have the desire or the ability to

take on the responsibility that comes

with it. Managers may be uncomfort-

able with sharing information (and

power). In fact, managerial roles may

have to be redefined before OBM can

be introduced. And many managers

may be reluctant or unable to make

the behavioral changes associated with

such a move, often to the point of

changing organizations.

As people closest to an activity

receive information and are empow-

ered to make decisions, the focus of

management shifts from giving orders

to facilitating information flows for

optimum decision making. Indeed, the

practice of OBM is consistent with the

practice of servant-leadership, whereby

the job of senior managers and com-

pany leaders is to serve and support

front-line employees in their efforts to

serve customers. At Manco, Inc., the

style of servant-leadership involves open commu-

nication, constant learning, high goal-setting, and

a roll-up-your-sleeves attitude that puts the con-

sumer first.

In light of all these challenges and potential

changes, a move to an OBM system requires

considerable preparation and training—and most

important, a sustained commitment on the part of

senior management.

IMPLEMENTING OBM: THE CASE OF MANCO

anco Inc., a medium-sized supplier to

the retail industry, is a private com-

pany headquartered in Avon, Ohio

that processes and distributes a broad line of

branded consumer products for retail and office

product channels. Its products, outlined in Fig-

ure 1, include adhesive tapes, DIY (do-it-your-

self) products, mailing and office supplies, and

children's craft supplies. Jack Kahl, Manco's CEO

and founder, bought out the original owner of

the Melvin A. Andersen Company in 1971 and

changed the name to Manco. As shown in Figure

2, the company has achieved high growth rates

since Kahl acquired it. Annual revenues have

risen from $800,000 in 1971 to nearly $167 mil-

lion for fiscal 1997, and the employee count grew

from one to more than 300 in the same period.

Much of this growth has undoubtedly been

driven by Manco's focus on customer service.

Kahl realized back in 1978 just how important the

partnership between Manco and the customer

was when he called on the then up-and-coming

discount chain Wal-Mart. He saw firsthand how

Sam Walton viewed suppliers as close associ-

ates—people who worked with Wal-Mart for

mutual benefit—and truly treated them as such.

Says Kahl, "Sam Walton will give [me] inspiration

until my last breath." The feeling must have been

mutual because Walton told Kahl in 1991, "Jack,

I now know what makes Manco great. It's your

people" (Hyatt 1991). Wal-Mart has been and

remains an important customer and strategic

partner for Manco.

Manco competes with much larger and

highly admired companies such as 3M and

Rubbermaid, yet it has the dominant market

share in its product lines. Figure 3 shows the

market share for DIY tape in 1997.

At the end of that year, Manco

held 53.4 percent of the market

versus 3M's share of 36.8 percent.

The company is also known for

its speed of product introduction

and rapid market penetration with

new products. Figure 4 illustrates

its rapid market share growth in

1997, when the company intro-

duced its Softex Bath and Kitchen

Product Line. Its expansion from 4

percent of the bath mat industry

in 1996 to 26 percent the next

year represents a one-year growth

of 550 percent.

Excellence in customer ser-

vice, speed to market in new

product development, and other

corporate attributes of success are

possible only with committed,

dedicated, and motivated employ-

ees. OBM, says Jack Kahl, is one

Figure 3

Market Share for DIY Tape

Other

3%

3M

37%

Tesa

4

Private

2%

Manco

54%

(Based on IRI Reports for 12/28/97;

$79.6 Million Retail Dollars)

M

Figure 2

Sales Growth for Manco., Inc. from 1971 to 1997

1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997

0

20

40

60

80

10

12

14

16

18

Millions of Dollars

Business Horizons / September-October 2001

8

of the keys to Manco's success and the primary

means of motivating its people. Kahl is a widely

respected top executive who, among other hon-

ors, has been selected by Industry Week as one

of America's most admired CEOs and by Inc. as

one of the top three CEOs in America to bench-

mark for business leadership. As he puts it, "At

Manco, we grow people. They grow profits."

Kahl started using many of his OBM ideas from

the very early days of Manco, having observed

the implementation of similar ideas firsthand at

Wal-Mart stores. "Wal-Mart has taught me the

most," he says.

Four Essential Steps in Implementing OBM

In Open-Book Management: The Coming Business

Revolution, John Case (1995) recommends four

essential steps to implementing OBM. Figure 5

extends these steps and provides useful tips and

practical examples for each one. The steps are

described below and illustrated by the experi-

ences of Manco.

Step 1: Get the information out there. Tell

employees not only what they need to know to

do their jobs effectively, but also how the division

or the company as a whole is doing. In essence,

reduce the internal differences between the infor-

mation available to owners and management and

that available to lower-level employees.

At Manco, learning is important and inform-

ing employees is a top objective. The company's

highest honor, the Spirit Award, recognizes curi-

osity. Instead of window offices apart from other

employees, its vice presidents work in offices

clustered in the middle of the room, called "Ac-

tion Alley." The cafeteria is a perfect example of

getting information out. On one wall, different

colors of duct tape trace sales growth over the

past three years. On another wall, year-to-date

daily sales are compared against the previous

year's on a chalkboard. Though a private firm,

Manco knows that its 30 percent employee stock

ownership is a crucial motivating factor for em-

ployees. A bar graph on one wall of the cafeteria

tracks the company's estimated share price since

1985, showing its "partners" (what Manco calls its

employees) how its success is translated into

each individual's personal wealth. Employees

never need to ask "What's in this for me?" when

they work hard to make the company more prof-

itable. The answer is right on the wall.

LED displays are strategically placed through-

out Manco to share company news instantly. On

one afternoon, the signs flashed the news, "We

cracked a 750-store drug chain," and employees

throughout the company burst into applause. "If

you want to move fast, you have to trust people,"

insists Kahl. "You give people power with infor-

mation, and you ask them to hold it in their con-

fidence and use it on your behalf. It's not an easy

thing for a lot of executives to do."

These are just some examples of the many

ways of getting information out. A company com-

mitted to OBM could and should come up with

other creative ways that are more suited to its

specific situation.

Step 2: Teach the basics of finance and

business. The decision to convert to OBM re-

quires a serious and ongoing commitment from

management and employees to engage in con-

tinuing education and training. The director of

human resources at Manco estimates that it takes

about two planning cycles (years) before employ-

ees become financially literate. OBM implementa-

tion can take a long time, and the effect on the

bottom line may not be apparent for a while.

The role of the Chief Financial Officer in an

open-book company differs markedly from tradi-

tion. The CFO is the "gatekeeper," the firm's key

financial expert who maintains the store of infor-

mation necessary for OBM. Because OBM relies

heavily on the financial talents and cooperation

of the CFO, he must often become a leader in the

OBM process and prepare the finance function

for its new role. The CFO generally needs to

become more open with information and should

be able to communicate, motivate, and coach

employees. Fortunately, the finance organization

at Manco reflects these attributes and has been an

effective leader for the OBM effort there.

Various techniques have been used to teach

employees about the basics of business. Typically,

groups of 30 or so at a time are trained in a class-

room. A company may have a six-hour course in

which simplified income statements and balance

sheets are covered. At this time or during another

4% 6%

90%

26%

5%

69%

Manco Ginsey Rubbermaid

0

20%

40%

60%

80%

100

1996

1997

Figure 4

Market Share for the Bath Mat Industry, 1996–97

Total market size is $31.6 million in retail dollars.

9

Open Book Management—Optimizing Human Capital

session, more complex issues such as inventory

costs and labor and how they affect the bottom

line can be covered. But classroom lessons must

be reinforced every day on the job if employees

are to comprehend the concepts fully.

Jack Kahl, who has been called a tireless

advocate of educational excellence, believes that

Manco should be a crucible of lifelong learning.

As the company has moved to progressively

larger headquarters, a large portion of each new

building has been dubbed "Manco University"

and dedicated to employee learning. In addition

to in-house training programs, Manco has gener-

ous programs to support self-education for em-

ployees at area colleges and universities; its "part-

ners" are encouraged to sign up for any type of

education, and reimbursement for an accredited

course does not depend on its relevance for

work at Manco. When implementing OBM, Kahl

put managers and employees through an inten-

sive financial and business education program

and introduced a similar system of weekly perfor-

mance reviews. He regularly holds meetings for

all employees, using the time to talk to them

about the company. He explains where Manco is

going and walks people through

the financials to show them how it

is performing. As a result, people

understand the business better,

rather than just their jobs. All of

the "partners" have access to all of

the financials, from gross sales and

gross margins to net profit.

Clearly, effectiveness is the

result when policies for getting the

information out are combined with

activities designed to make the

often arcane financial information

more understandable to all em-

ployees. This process is especially

effective when corporate financial

information is explained in terms

of personal financial activities.

Step 3: Empower people to

make decisions based on what

they know. Companies should

turn departments into business

centers whenever possible. They

should define goals at the unit

level instead of the corporate level,

so that employees understand the

impact they can have on these

goals. Manco has made each prod-

uct line and department respon-

sible for achieving specific finan-

cial and performance objectives.

All of its "partners" working in

shipping and distribution, for ex-

ample, are authorized to stop ship-

ment of an order that does not

meet corporate quality standards. According to

Garfield (1997), Manco understands

that service, like quality, cannot be man-

dated; it must be volunteered. As a re-

sult, instead of focusing on service poli-

cies and procedures, [Jack Kahl] strives to

build within Manco a caring culture that

will naturally elicit high-quality service.

This culture, emphasizing high levels of cus-

tomer service, encourages employees to focus on

solving problems instead of trying to fix blame.

The "partners" feel free to do whatever is neces-

sary—within reason—to restore good service

without necessarily seeking permission or ap-

proval from senior managers.

Step 4: Make sure everyone shares di-

rectly in the company's success, as well as in

the risk of its failure. OBM bonus systems vary

widely, but the overall message is the same: Re-

ward employees for business success. Traditional

bonus systems do a poor job of communicating

this critical link. In fact, employees often begin to

expect the annual bonus and view it as a regular

Figure 5

The Four Essential Steps to Open-Book Management

Offer awards, such

as the "Spirit Award."

Display financial

information in

the lunch room. Make employees

financially literate. Teach employees

about cost controls.

Teach employees

how to read basic

financial statements.

Reward employees

for business success

with a bonus plan.

Have an

ESOP plan.

Peg bonuses to numbers

employees see regularly—

numbers they can understand

and have an impact on.

Treat employees

as "partners" in

the organization.

Turn departments

into business

centers.

Give employees access

to all the financials, from

gross sales and gross

margins to net profit.

Display the firm's

stock price in a

prominent location. OPEN BOOK

MANAGEMENT

STEP 1

Get the information out

there (reduce information

asymmetry).

STEP 2

Teach the basics of

financial and

performance measures.

STEP 3

Empower people to make

decisions based on what

they know (allocate

decision rights).

STEP 4

Make sure everyone

shares directly in the

firm's success (reduce

agency costs).

Business Horizons / September-October 2001

10

part of their compensation. OBM bonuses, in

contrast, are pegged to numbers that employees

see regularly, numbers they understand and on

which they know they have an impact. Manco

sets annual targets for net earnings and return on

operating assets. If employees hit both targets,

the company pays bonuses ranging from 10 per-

cent to 50 percent of their total compensation.

Employee stock ownership is also a powerful

tool for rewarding employees. Current research

shows that equity-based incentives (stock option

plans, restricted stock plans, and direct stock

purchase plans) motivate

employees to maximize

shareholder value and

are more effective in

reducing agency costs

than retirement incen-

tives.1 At Manco, the

"partners" own 30 per-

cent of the company.

There is also a profit-

sharing program. While

Manco stock is not pub-

licly traded, it is valued annually by an indepen-

dent investment banking firm for transactions

with its participating employees.

Achieving corporate goals at Manco can be

fun, with the successes being celebrated widely

and wildly. A few years ago, Jack Kahl had his

head shaved at the company's annual "Duck

Challenge Day." His senior management team

had dared him to do so if they achieved his

stretch goal for sales that year. The event ended

up in the local and national press, and even had

a spot on the Late Show with David Letterman.

Of course, the attention also provided Manco

with invaluable publicity and a brand image that

no amount of advertising dollars could buy. Even

the company's Web site, www.manco.com, is fun.

Manco's mission statement, included on the

Web site, sums up how OBM transforms a firm:

Manco's mission is to build a consumer

products company that offers products

and services to our customers that will

bring quality and care to their lives. Our

backyard, the United States, is our foun-

dation for growth, and we will strive

always to build new buying and selling

partnerships globally. Quality products

and caring personal relationships will

always be the formula used for deliver-

ing extraordinary value to our only boss,

the Customer.

Getting Started with OBM

Other companies can replicate Manco's success

with OBM. Because of the need for a major

change in the way a company is managed, it may

be best to start experimenting with small steps

and move on to bigger ones as the company and

its employees gain experience and become com-

fortable with the new culture.

Based on recommendations by others as well

as our own assessment, the following procedures

are recommended for those firms wishing to test

the water before taking the plunge. Some of the

procedures are easier to implement than others,

and a company may want to try progressively

more difficult methods and policies as it gains

experience. Whenever appropriate, examples of

how Manco has implemented these procedures

are used to illustrate these concepts further.

1. Play a game to get employees thinking

about key numbers such as "guess the cost."

Just because financial information is made widely

available does not mean employees will under-

stand its meaning or importance. Most are often

shocked to see how small a company's net in-

come is as a percent of each dollar of sales. So it

may be useful to make a game or a contest in

which employees guess or estimate net profit or

other important financial data as a way for them

to become familiar with the numbers.

2. Start OBM with the managers first. For

example, ensure that certain managers under-

stand what the assets, liabilities, and other key

financial variables are and how they relate to the

relative profitability of their area. If managers are

not convinced of the value of OBM, it will be

much more difficult to involve lower-level em-

ployees in the concept. Once managers are

trained in OBM, they will be key players in dis-

seminating information to their subordinates.

3. Start distributing information and at-

tach a cash reward to its understanding and

use. Employees should be able to collect (rela-

tively small amounts of) cash rewards for demon-

strating an understanding of company financial

information—and more if they can show they

were able to use the information to improve their

performance. Manco presents a "Thrifty Duck

Award" to an outstanding "partner" for his or her

cost "re-duck-tions" and improvements.

4. Play a business game that gets the em-

ployees' attention. Manco has a wealth of ex-

amples to illustrate this technique. Consider its

Duck Challenge Day, which started with a bet in

1990 between Kahl and his two sons, John and

Bill. John, who was in charge of sales at the time,

was explaining his sales projections for the rest

of the year, which happened to fall just short of

$60 million. Always raising the bar, Kahl said, "If

we reach $60 million in sales this year, I'll jump

in the pond out in front of the building." Kahl's

sons knew the pond would be cold that time of

year, so they immediately communicated the bet

to the rest of the company.

"Achieving corporate

goals at Manco can be

fun, with the successes

being celebrated

widely and wildly."

11

Open Book Management—Optimizing Human Capital

With all employees doing their best to reach

the sales goal, Kahl ended up taking a swim in

the 45-degree water in the Manco duck pond.

From then on, a new challenge was issued each

year. By 1995, 59 "partners" had joined Jack for a

celebratory swim. The Duck Challenge Day has

since become an annual event. In addition to

having his head shaved, Kahl has performed

other stunts each year to motivate partners to

reach sales and other goals.

5. Set up an Employee Stock Ownership

Plan (ESOP) and use it to implement OBM.

Thirty percent of Manco is owned by its long-

term employees. In addition, all "partners" par-

ticipate in a profit-sharing or bonus plan.

6. Ask employees to show how they

make money for the company. Employees at

Manco, for example, are required to indicate the

ways in which they serve internal and external

customers.

7. Make learning about the business a

game. Manco once held a contest to see who

could create the cleverest name for excess inven-

tory. The originator of SCUD, or "Still Collecting

Unwanted Dust," won $200.

8. Play a game that gets customers or

suppliers involved in your business. This step

not only shows customers how much you care

about their business, it also reminds the firm's

"partners" (sometimes in a humorous way) how

important the products are to the customers.

Manco once held a contest in which it asked

customers to reveal their best uses for duct tape.

One winner, reports Palmeri (1997), was a zoo in

Kansas that used the tape to keep a newborn

kangaroo in its mother's pouch.

Concerns and Potential Problems with

Implementing OBM

What if top management has a hard time sharing

the financials with employees and is fearful of

delegating decision-making? Top management

must be willing and ready to share previously

private financial data if it chooses to implement

OBM. Traditional management is generally hierar-

chical and managers often use their preferential

access to information to wield power. So intro-

ducing OBM can alter traditional sources of influ-

ence and power in a company. Under such con-

ditions, it is natural that many managers are fear-

ful of it. If this is the case, starting with small

steps is a good way to try out OBM.

What if customers (suppliers) obtain cost data

about our products and try to use them to negoti-

ate lower (higher) prices? Manco has taken a bold

position by sharing financial information with

retail and wholesale customers and vendors. Jack

Kahl's philosophy is to build trust, not only with

employee-partners but with all business partners,

including suppliers and customers. As a sign

posted at Manco says: "Trust is our foundation

for growth, and the best way to create trust is to

earn it every day."

What if our competitors get our financial

statements and try to use this information to gain

a competitive advantage? Financial information is

the history of how a company has been perform-

ing. The financial statements show how it has

been operating, but do not contain its business

strategies. If a company is performing efficiently,

it is unlikely that competitors will gain any com-

petitive advantage from these statements. How-

ever, if a firm remains concerned about this, the

company should evaluate whether the potential

benefits of OBM outweigh the potential costs.

Even though Manco is a private company, its

financials have been widely available for a long

time, and so far it is gaining market share in a

highly competitive business. External availability

of financial information generally does little if

anything to alter a firm's competitiveness.

Can a firm give away too much information

about its business? Yes, and this is not what OBM

is intended to do. For example, a firm should

share financial results but not salaries, which are

personal data. Information on classified projects

and patented products and processes also should

not be shared.

Do all firms benefit equally from OBM or is it

better for certain types? While OBM potentially

holds benefits for all companies in competitive

industries, a large number of firms practicing this

technique are privately held. Traditionally, such

firms share less financial

information than public

ones. Moreover, annual

and quarterly reports,

proxy statements, and

other financial docu-

ments are available for

all publicly held compa-

nies. Because of this

"internal asymmetric

information" between

the owners and employ-

ees, private firms stand

to benefit significantly

from the practice of

OBM. Publicly held firms can also benefit, espe-

cially considering that financial and operating

data are not generally available in adequate detail

for divisions of public companies. Large corpora-

tions such as Wal-Mart and Sprint, for example,

have used OBM successfully. Firms in certain

industries may benefit more, particularly those

operating in competitive or oligopolistic indus-

tries. Finally, firms in some countries, regions, or

industries may not have the cultural orientation

necessary for OBM to take root.

"Under such conditions,

it is natural that many

managers are fearful

of it. If this is the case,

starting with small steps

is a good way to try

out OBM."

Business Horizons / September-October 2001

12

Although there may be some concerns with

sharing information under OBM, the success

stories at firms like Manco demonstrate that the

benefits can outweigh the potential costs in many

cases. Manco is just one company reaping the

many benefits of such a culture. Any company

can start implementing OBM progressively using

the steps outlined here. But implementation in-

volves a transformation in corporate culture—a

significant step and one that should be under-

taken only after much deliberation. The many

benefits of OBM are likely to appear only gradu-

ally as cultural changes take place slowly. So it is

important to remember that once OBM is ac-

cepted, it requires sustained commitment by se-

nior management.

he burgeoning role of technology and

human capital in business success is

making the practice of open book man-

agement ever more useful—perhaps even criti-

cal—for modern organizations. OBM is based on

the principle that managers and employees who

know and understand financial performance and

goals and share a stake in organizational success

are more apt to be highly effective and motivated

in meeting those goals. As a result, management

overhead and the agency problems between

employees, managers, and owners will be much

lower.

As the case study of Manco shows, not only

can the practice of OBM lead to financial and

organizational success, it can also make work fun

and exciting. Its implementation is often consid-

ered a management process, but OBM addresses

traditional finance issues of asymmetric informa-

tion, agency costs, compensation, and corporate

governance. With the success of technology in

optimizing transaction-focused financial activity,

OBM can be a useful new focus of leadership for

the finance function.

Although OBM offers significant advantages

and has been available for more than 20 years, its

rate of adoption is only now picking up. Because

it requires changes in hierarchical management

styles and leads to shifts in sources of authority

and power, it has not been very popular with

many traditional managers. But with technologi-

cal changes transforming business and the con-

current rise of intangible and human capital as

the main sources of wealth creation, OBM has

begun to find its place in the business world. ❒

Notes

1. Frye (1999) offers empirical evidence that finds

shorter-term equity-based incentives more effective in

motivating employees to maximize shareholder value.

ESOPs are becoming increasingly popular and, accord-

ing to Capell (1996), more than 2,000 firms adopted

such plans between 1989 and 1996. However, there is

some evidence that their benefits may be greater for

high-growth companies and companies with a large

ownership block (to offset the negative effects of

managerial entrenchment). Park and Song (1995) pro-

vide more details.

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T

13

Open Book Management—Optimizing Human Capital

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1999, pp. 38-48.

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Profitability: Manco, Cleveland, Ohio," in S. Player and

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Raj Aggarwal is the Firestone Chair and

professor of finance at Kent State Univer-

sity, Kent, Ohio. Betty J. Simkins is an

assistant professor of finance at Okla-

homa State University, Stillwater, Okla-

homa. Raj Aggarwal thanks his fellow

board members at Manco for useful

discussions on OBM. In addition, the au-

thors wish to thank the following people:

Jack Kahl and his staff at Manco for

providing access to the company; Tom

Coughlin of Wal-Mart for clarifying the

nature of servant-leadership in an ad-

dress to one of the author's classes; two

anonymous referees; and J. Byers, M.

Fedor, R. Johnson, J. Mariotti, N. Modani,

R. Storey, M. White, J. Williamson, and

participants at the Eastern Finance Asso-

ciation and the Financial Management

Association Annual Meetings for useful

comments. The authors remain solely

responsible for the contents.

... In relation to OBM dimensions, Nikzad and Maryam (2012) reported four of OBM, which were employee empowerment to make decisions, employees' direct participation in the organization's success, teaching employee on financial performance and performance measures as well as information sharing. Aggarwal and Simkins (2001) identified four steps of OBM implementation, which were information sharing with employees, management commitment and employee engagement in employee education and training, employee empowerment, and employee direct participation in the organization's success. Rich et al. (2010) defined EJP in terms of activities that contribute directly to the achievement of organizational tasks or at least supports the achievement of these goals. ...

... However, studies on open book management are few, but there were some studies that have taken into their account the relationship between open book management indicators such as employee empowerment, employee training, information sharing, and staff involvement in organizational success, and employee performance. Following Nikzad and Maryam (2012) and Aggarwal and Simkins (2001), OBM was conceptualized in the current study as a latent variable composed of three dimensions, i.e., employee empowerment, employee training and employee participation. According to Yukl and Becker (2006), empowering employees in the context of open book management is to entrust them and let them get the financial picture of the company through providing them with financial data such as revenues and profits. ...

... OBM has been introduced as a corporate strategy aimed at motivating employees to do their best in relation to organization's financial health. Three pivotal pillars were established as key aspects of OBM; employee empowerment, training and participation in order to make the organization a profitable one (Aggarwal and Simkins 2001). Research on employee empowerment and customer satisfaction has reported a positive impact of employee empowerment on customer satisfaction (Ugboro and Obeng 2000, Peters and Mazdarani 2008, Isimoya and Bakarey 2013. ...

  • Faisal Abdulkarim Alkhamis

This study aimed at investigating the impact of open book management (OBM) on customer satisfaction in the presence of employee job performance as a mediating variable. OBM was measured using employee empowerment, information sharing, employee training, and employee participation in organizational success. A sample consisted of 500 managers and employees from 10 industrial companies in Qassim region were participated in the study. Data were gathered using a questionnaire administered to participants. The final number of questionnaires received was 387 questionnaires with a response rate of 77.4 percent. The results showed positive as well as significant effects of employee training, empowerment and participation on employee job satisfaction and customer satisfaction. The results further pointed out that employee job performance mediated the effect of open book management dimensions on customer satisfaction. The originality of this study wells up from its contribution to literature as it underlined that employee training in the context of open book management should take the first priority, followed by employee empowerment as empowerment efforts do not bear its desired fruits in the absence of an employee who is able to properly implement what he or she empowered to do. It was recommended on the ground of these results to consider employee training, then employee empowerment in the context of OBM. An adoption of OBM is required to keep tabs on employee job performance in order to ensure an effective practice of OBM.

  • Michael C. Jensen Michael C. Jensen
  • William H. Meckling

This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the 'separation and control' issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears the costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.

  • L.T. Hosmer

Numerous researchers have proposed that trust is essential for understanding interpersonal and group behavior, managerial effectiveness, economic exchange and social or political stability, yet according to a majority of these scholars, this concept has never been precisely defined. This article reviews definitions from various approaches within organizational theory, examines the consistencies and differences, and proposes that trust is based upon an underlying assumption of an implicit moral duty. This moral duty—an anomaly in much of organizational theory—has made a precise definition problematic. Trust also is examined from philosophical ethics, and a synthesis of the organizational and philosophical definitions that emphasizes an explicit sense of moral duty and is based upon accepted ethical principles of analysis is proposed. This new definition has the potential to combine research from the two fields of study in important areas of inquiry.

  • Michael C. Jensen Michael C. Jensen
  • William H. Meckling

In this paper we draw on recent progress in the theory of (1) property rights, (2) agency, and (3) finance to develop a theory of ownership structure for the firm.1 In addition to tying together elements of the theory of each of these three areas, our analysis casts new light on and has implications for a variety of issues in the professional and popular literature, such as the definition of the firm, the "separation of ownership and control," the "social responsibility" of business, the definition of a "corporate objective function," the determination of an optimal capital structure, the specification of the content of credit agreements, the theory of organizations, and the supply side of the completeness-of-markets problem.

Three types of trust in economic exchanges are identified: weak form trust, semi-strong form trust, and strong form trust. It is shown that weak form trust can only be a source of competitive advantage when competitors invest in unnecessary and expensive governance mechanisms. Semi-strong form trust can be a source of competitive advantage when competitors have differential exchange governance skills and abilities, and when these skills and abilities are costly to imitate. The conditions under which strong form trust can be a source of competitive advantage are also identified. Implications of this analysis for theoretical and empirical work in strategic management are discussed.